Analyse how the problem of uncompetitiveness in the UK economy can be solved by exchange rate adjustment.

Exports and imports are linked to the exchange rate. If there were a strong pound then it would increase the amount the UK would import because they will be cheaper. The reason for this is because other currencies will be seen as weaker so if the UK bought things from other countries the exchange rate would benefit, as the pound can now buy more of their currency. It would then have the opposite effect on exports. If the pound were strong then other countries would buy fewer exports, as they would be lots more expensive for them across the exchange rate to change from one currency to the pound.

If the UK became uncompetitive then it would have to lower its exchange rate because it would mean our exports would become cheaper for other countries. It would also mean that the UK would import less as it would become more expensive for them. This leads to high competitiveness, as the prices of the global market compared to the UK market would become more consistent.

What is it meant by competitiveness and why is a lack of competitiveness seen as a problem?

The term competitiveness is used in describing when two or more firms or economies compete against each other. To have high competitiveness they should all be able to produce their products at roughly the same price including export cost. This means consumers will get a larger range of companies to buy from and lower price as the competition will force the overall price down. So if there were only a few firms in a market there would be a lack of competitiveness so the price of products will not be as low for the consumers as they should be.

If an economy were to become less competitive in a market then this would cause major problems. The first would be increased unemployment, as firms will have to close down, as they can no longer sell their own products because other firms can sell them for much cheaper. It would also mean that there would be deterioration in the Balance of Payments as the economy will import more and export less. This will usually be because there is a decrease in productivity, meaning industry will produce less with higher cost so will become less competitive.